Fiscal Friday: Achievement unlocked!

Warning: Slightly boring update on my debt situation ahead. Feel free to skip this post if you're not interested; it's really for my own documentation as much as (if not more than) it is for anything else. So. Last weekend I made my final payment on my "school loan" that I owed to my dad! I still have a really long way to go — as in, several thousand dollars long — but this was a particularly rewarding milestone because I got to see the look on my dad's face when I handed him that final check. And it was made even sweeter because my final "debt snowball" payment was supposed to be next month, but I made a double payment this month as a surprise birthday gift to him. So in total, I paid that debt off about a year and a half earlier than I was originally supposed to!


Now all I have left to tackle are my car loan and the personal loan I took out to transfer my credit card balances. And with the way the debt snowball works, my payments will get bigger and bigger each time I pay off a debt and start to focus on the next one. So my payments on the next lowest debt (my personal loan) are about to quadruple (or maybe even increase even more than that).

Also, I noticed that I've mentioned the Dave Ramsay debt snowball plan here on the blog before, but I don't think I've really properly explained it. Basically, here's how it works. Say I have four major debts to pay: $500 on Credit Card A, $1,000 on Credit Card B, a $2,000 Personal Loan and a $5,000 Car Loan. For the sake of simplicity, let's say my minimum payment for all four debts is $25 a month and all four have a 0% interest rate.

The debt snowball dictates that you focus on paying down the debts one at a time, in order from lowest to highest. So in this case, Credit Card A (CCA) is my main concern. I make payments as large as possible on it every month, while making minimum payments on all the others. So say I pay $100 a month on CCA, while making the $25 minimum payments on the other three. In five months, my debt is reduced to: CCA - $0, CCB - $875, PL - $1,875 and CL - $4,875. One debt down!

The next month, I take the amount I was putting toward CCA ($100/month) and add it to the minimum payment for the next lowest loan, CCB. So I'm now paying $125 on CCB, and the minimum on the other two. In seven months, CCB will be completely paid off. And at that time, my debt will stand as: PL - $1,700 and CL - $4,700. I then take the amount I was paying on CCB ($125) and add it to the minimum on PL, making my new payments $150. And by the time PL is paid off, CL's balance is down to $4,400, and I'm ready to start making payments of $175 on it until it's paid down.

Now, where the snowball really takes off is when you start adding your "extra" money to the "snowball" payments. Plus, in real life, interest is a factor that extends the length of payments, but minimum payments are usually higher. So instead of having a "snowball" of $175 at the end, I'm looking at payments in the $700+ range. If all goes well, I expect to be debt-free before the end of this year, and maybe even before Halloween! Let me tell you how I feel about that.


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FIscal Fridays: Some random stuff I've been thinking about

So I've been pretty terrible with the Fiscal Fridays posts lately. To be honest, there hasn't been much going on. Per Dave Ramsey's "Debt Snowball" instructions, I've been making triple payments on my smallest debt (the loan I took from my dad in college). And now, I'm nearly done making payments--I have about one and a half left. That's about a year and a half earlier than the original repayment plan we set up, which feels pretty amazing. That alone is a year and a half less that I will spend in debt; and when I start making supersized payments on my other loans, I'll reduce my "debt timeline" even more. That feels really amazing.

And because this post would be really terrible if all I did was a not-so-humble brag, I'm going to abruptly change the subject now and talk about taxes for a moment. I got two of my needed tax forms so far: The two W-2s from the two full-time jobs I worked this year; I still need two 1099-MISCs for my freelance work, plus another form or two regarding my retirement plans. And a random, blog-worthy Tax Tidbit (I enjoy alliteration far too frequently) popped into my head. So...

Emma's Tax Tidbit #1:
You can reduce your taxable income--that is, pay taxes on less money than you actually make in a year--by paying into certain programs.

For me, paying into a retirement plan and an employer-sponsored health plan landed me the reduction. So I paid X amount--let's make this easy, I'll say I paid $10--into a 401(k) for the first few months of the year, at my first job. Then, I paid $30 into a 457(b), which is kind of like a 401(k) but for public-sector employees. By doing so, I lowered my taxable income by $40 total. So if I made $100 in 2012, I would now only have to pay taxes on $60 worth. Something similar happened for the first time this year for me because I paid for employer-sponsored health coverage. I don't think that has to do with the Affordable Care Act/Obamacare...but because it was only on the return for the second job I had this year, it might have to do with working in the public sector. I'm going to try to find out (re: ask my dad/Google it) and will get back to y'all there.

Basically, anything you can do to reduce your taxable income is good, because it means you pay less taxes. And that's the really cool thing about the incentive, I think--it's for stuff you should be doing anyway. Like saving for retirement. I don't care how old you are. I don't care if you're flipping burgers for your first job. If your company offers a retirement plan, like a 401(k), pay into it. Even if it's only five or ten bucks a paycheck. The younger you are when you start, the more interest will compound to give you a major nest egg for later. In fact, a person who starts $200 a month when she is 30 cannot catch up to the amount that she would have gotten by retirement age if she had started saving just $100 a month when she was 20.

Also. It's just occurred to me that I should probably list a disclaimer. I am not a financial adviser or a CPA. I have no formal education in finance, or taxes. I only have my own personal thirst for knowledge on how to make my money work for me, not the other way around. I will say that I do a bit of reading on the subject, and I take a LOT of advice from my dad, who probably could get a job as a financial adviser if he really wanted to. He's very smart. Anyway, point is: While I try to be as specific and accurate as possible on these topics, I might on occasion make a mistake. Please don't hate me if you take my advice without researching it for yourself, as it's applied to your situation, and then something bad happens. KThanks :)

Fiscal Fridays: Balance transfers and loans

Would you believe me if I told you I was about to reduce my credit card debt (which, without going into specifics, a few thousand dollars) to almost zero in a week or two? I wouldn't, either. But I am. They're not technically being paid off, but I am transferring the balances on my two Visa cards—which currently have an 18% and 27% interest rate, respectively—to a lower-interest loan.



See, I joined a great credit union back when I bought my car. They gave me an auto loan at 4% interest, which I could hardly believe I qualified for. Then, this week I got a flyer in the mail with details about opening a personal line of credit. With my very-slightly-above-average credit score, I qualified for a loan with a rate of prime plus 2.25%, which works out to be 5.5%, since the current prime rate is 3.25%.

Of course, I consulted my father about my high-balance, high-interest rate cards, and opening a personal loan was actually the first thing he recommended. See, having various types of debt (personal loan, auto loan, credit cards) is somehow better than having all credit card debt. Apparently, having a blend of secured and unsecured debt makes you appear more reliable to creditors, according to my dad.

So I called my credit union and applied. But there was a condition: I have to cut up one of the credit cards. Isn't this bank great? Not only do they give me a low-interest loan to help me manage my debt, but they also crack jokes at the same time. Of course, I had already planned to cut up the 27% interest card. I can't really close it, because closing an account you've had for a few years can hurt your score. But that sucker is already in pieces (see photo above).

The best part? The loan is revolving. That means when I pay the balance down, that line of credit will still be available for me to borrow from. So if I have some sort of emergency—say, I break my leg—I have a little extra backup money available to borrow, at a lower interest rate than any credit card.

I'm just so excited to be in a position to eliminate the balance on these cards. With a lower interest rate, my payments will do more work, instead of just helping me tread water. (On the higher interest card, my monthly interest made up nearly 3/4 of my minimum payment—which was so high, I could barely afford to pay more than that.) My goal? To have that loan repaid in under two years. Definitely doable.

Of course, transferring credit card balances to a personal loan isn't an option for everyone. Commercial banks aren't giving out many personal loans right now because of the terrible economy. And really good credit unions are hard to find—I only am eligible for this one because of the company my dad works for. Another option for some people may be to transfer the balance to a new credit card. Often, there's a 6-month, no-interest grace period when you first open a card, which allows you to make six months' of payments without the added cost of interest.

But take this route with caution. I tried it in college, and wound up maxing out the NEW card as well! (That was the one that stuck me with 27% interest in the end...so not worth it.) Opening a new card and not using it for purchases takes a lot of discipline, and it isn't a good option if you have more than a grand or two on the existing card, in my experience, because it's hard to get approved for a high-limit card if your existing account is maxed out.

So talk to a financial adviser or a trusted person with some know-how to see what options are best for you. And I would recommend against talking to a commercial banker at a place like Chase. They're basically salespeople and will say whatever they can to get you to open a new credit card at their institution.

(P.S. Go check out Emily's blog, Tinfoil Tiaras, at some point today. She's wearing my red Limited skirt as part of the blogger clothes swap I mentioned a while back! And might I add, she looks fabulous.)